- The Washington Times - Friday, July 13, 2001

Homeowners who also are landlords can pay off their mortgage more quickly, finance major remodeling and even enrich their lives. Rental property can be created by adding an apartment over the garage, fixing up the basement to house an exchange student, or even building another home on your land.

Rent for such dwellings can bring in $300 to $1,000 every month enough to offset an expensive mortgage or supplement an insufficient income.

But before placing a "For Rent" ad in the paper, there are many things to consider: What are the tax, zoning and legal implications? How will it affect your family? What kind of lease will you have them sign? Do you mind pets?

Many hopeful landlords have found investing in real estate to be more of a washout than a windfall. A 1995 Census Bureau survey of rental-property owners found that 27 percent of landlords lost money in 1994 and that 16 percent didn't even know whether they had made or lost money.

But if you do your homework and know what you are getting into, being a landlord can be a rewarding experience.

"We have rented out a room in our home for four years," says Dann Rockwell of Alexandria. He and wife Terry bought their current home with the added income in mind.

"We looked for an older house that I could remodel for this purpose," Mr. Rockwell says. "We added a bathroom and two bedrooms, and get $800 per month for each student we house. That's important to us, because Northern Virginia is a very expensive place to live."

The Rockwells have found a way to profit in ways other than financial. They rent to foreign-exchange students and are paid by Eurocenter, an organization that coordinates trips for people who want to learn English and understand American culture.

"We like the idea of making a student a part of our family," says Mr. Rockwell, a youth pastor. "Our children are home-schooled, and this exposes them to other cultures in a very personal way."

The downside of renting to foreign-exchange students is the intermittent nature of it. The Rockwells have served as hosts to 25 students, but each one only stays for one to six months. That kind of turnover can be disruptive to your home and detrimental to your profits.

To find a longer-term tenant, you need to get the word out. Running a classified ad is an obvious way to find a tenant but might be too broad of an approach for some would-be landlords. Who knows what kind of tenant you might get?

Instead, word-of-mouth can be a great way to find a more suitable person to share your home. Many landlords have great experiences renting to friends or acquaintances who they came into contact with informally.

If you already have spread the word at work and among your friends, consider placing a notice on bulletin boards in your grocery store, library, health club, church or community center.

If this doesn't work, there are services that will list your room for rent in their database for a fee. Such companies, of which there are many even more on the Internet usually provide an opportunity for landlords to tailor their ads to suit their preferences regarding pets, smoking and length of lease.

You may not consider a lease necessary if you are renting a room to your cousin or close friend, and eviction might feel like a remote possibility. Still, it happens. And what if your subsequent tenant is someone you don't know?

Fortunately, evictions don't happen often. Only 9 percent of owners in the Census Bureau survey had initiated eviction proceedings during the previous two years. But in that same period, 27 percent of landlords said they had experienced late payments.

To protect themselves, most landlords check out their tenants. Credit reports, personal references and employment checks were each used by half of the landlords in the survey to screen prospective tenants. Three-quarters of the landlords conducted personal interviews.

Lawrence McClafferty, a lawyer with McCandlish & Lillard in Leesburg, has a recommendation he makes strongly to landlords: "Screen your applicants carefully. Have them complete an application, speak to their previous landlords, check out their employment, call their references."

You will, of course, need to get permission to make these contacts, but that can be written into the rental application.

"Some folks don't even use an application," Mr. McClafferty says. "They just interview a person for 10 minutes and let them move in because they seem nice. Remember that this is your home they will be living in."

Should you ever decide you don't want them in your home, you may find your hands tied. Due to a legacy of abusive landlords, tenant law in most jurisdictions provides renters with significant protection.

You cannot, for example, lock someone out for late rent. Nor can you turn off the water or electricity. Eviction is a legal proceeding, one that probably will involve hiring a lawyer, filing suit and having the court remove the tenant. This will, of course, lead to a less-than-harmonious climate in your home.

Some homeowners find these rules surprising. Not understanding them can be dangerous.

"Things can really go south," Mr. McClafferty says. "People think, 'Well it's my house, and if I don't like you I can lock you out.' If you do that, the sheriff may come to see you, and you'll quickly have a lawsuit on your hands."

Mr. McClafferty cites a specific incident he handled recently for a client. A young woman bought a town home and rented a room to a young man. Before long, they were arguing over such things as sharing food and his portion of the cable bill.

"Eventually, she became fearful of him and her father came in to change locks and put all the tenant's belongings outside. The young man filed suit for unlawful entry and eviction and thus began a lengthy and expensive legal process."

Many of these situations can be avoided by having a signed lease that both you and your tenant understand. You might as well write up a lease, because in many states even a verbal agreement entitles a tenant to legal rights by which you must abide.

There are standard lease agreements used by many landlords. Your Realtor can provide you with one. But Mr. McClafferty suggests that owners invest the several hundred dollars it will cost to have a lawyer write up a good lease that will protect you and your property.

If you plan to be a landlord for several years or more, this is probably an investment worth making.

"When you are talking about a room in your house, you need to tailor a lease specifically to your situation," he says. "For example, you'll probably want your tenant to waive the usual 30-day notice for termination. You don't want to give someone that much time to hang around in your house if you want him or her out. I usually suggest a seven-day termination clause."

Conducting yourself and managing your home professionally can make a world of difference. Even if the prospective tenant is a good friend, a bad rental situation can damage your friendship permanently.

"You may get along great with your tenant, but you should both recognize that this is a business transaction," Mr. McClafferty says. "You have every right to expect a security deposit, timely payment of rent and so forth."

If your home needs to be expanded before you can rent out a portion of it, you have some planning to do long before you worry about leases and evictions. Before you begin any construction, you will need to get permits from your county or city. If you are paying a contractor to do the work, he will take care of the permit issues. He also will advise you of any adjustments you may need to make to your plans to make them legal.

Some communities don't allow certain kinds of additions at all, so be sure to consult an experienced contractor before you start plotting your profits.

Fairfax County, for instance, does not allow a single-family dwelling to be converted into a multifamily dwelling. An addition is generally considered to be a second dwelling if it is self-sufficient, with kitchen, bathroom, living and sleeping areas. Doing a smaller remodeling job typically isn't a problem, but you need to get the right permits and understand the building codes involved.

If you don't get the correct permits or do the work incorrectly, don't count on making much of a profit. A basement bedroom without a door or crawl-out window legally isn't a bedroom, and you cannot list it as one when you sell the home. It's possible that such an addition to your home will add zero value when you sell or that you'll be forced to describe it as a "den" in your home listing.

These are not just pesky rules there are real safety issues to contend with. According to local building codes, every sleeping room must have an escape route.

"There must be an egress window or exterior door, other than the bedroom door," says Robert Fina of Fina Construction in Alexandria. "In case of a fire, there has to be a way of getting out of the room or of being rescued by the fire department."

If you plan to rent your basement to someone, you may need significant remodeling before it's safe. The egress windowsill cannot be higher than 44 inches off the ground and must be big enough so a person can climb out of it. In many homes, that would require work costing thousands of dollars.

A basement room also might have a problem meeting ceiling-height requirements 7.5 feet is a common minimum. Rooms typically must have a smoke detector and be a minimum of 70 square feet in size.

Once you become a landlord, the Internal Revenue Service is going to have something to say about all those monthly rent payments you are collecting.

You will have to pay taxes on your profits, but renting a room in your home is still a smart tax move. You get to write off some expenses and even depreciate the rented portion of your property.

An important figure to determine is the portion of your home that is being rented. For instance, assume that 15 percent of your home is rental property. If you replace your roof, you will be able deduct 15 percent of that expense from your rental income for tax purposes.

"But if you repaint your tenant's bedroom, you can write off the entire amount," says Rob Huey, an accountant and president of Huey & Associates in Bethesda.

Utilities, insurance and other operating expenses also may be deducted, relevant to the percentage of rented space.

The most confusing tax issue for landlords is depreciation.

"People sometimes don't take advantage of this because it is rather complicated," Mr. Huey says. There are benefits to taking the deduction for depreciation, so it is worth your time. If you aren't sure how to do it, hiring a good accountant is probably a smart move.

If you do depreciate the rental unit in your home, be careful when you sell. A portion of your income from the sale will be taxable as capital gains. And even if you didn't bother with depreciation, Mr. Huey warns that the IRS might still hit you for capital-gains taxes.

One other detail you may need to address is insurance.

If you simply rent out a bedroom in your house, insurance shouldn't be an issue for you. Your homeowner's policy probably will cover that portion of the house.

If, however, you add an apartment over the garage so it has its own entrance you may have a different case on your hands. Different insurance companies handle in-law apartments differently, so be sure to ask yours before you do any work.

If it is a detached unit, with separate utilities and a unique entrance, you may have to take out a second insurance policy.

Most homeowner's policies will cover additions to a home but not the contents of a rental unit. For these, the renter will have to buy renter's insurance. If the tenant is a member of your immediate family, however, some insurers will cover the content of the unit.

Check list:

Ask yourself

• Will your tenant use a separate entrance?

• Will he have access to your portion of the home?

• Do you have the time and ability to maintain the property?

• How do you feel about your tenant having guests stay overnight?

• Which rooms will be "mine," "theirs" and "ours"?

• Who is responsible for upkeep and cleaning of bathrooms, kitchen and other common areas?

• If you are sharing your kitchen, are you sharing your food as well? Will there be two gallons of milk, two jars of jelly and two loaves of bread in the refrigerator?

• Will the hours you keep conflict? Will your tenant's television keep you awake late at night?

• Is there room for only one car in the driveway or garage? Who will park there?

• Will a tenant who smokes in the home bother you?

• Will you allow a pet in your home?

To do

• Call insurance company will the unit be covered under existing policy?

• Bring in a contractor if remodeling is needed, what will it cost?

• Calculate potential income will it pay off?

• Discuss with family how will the proposal affect family life and privacy?

• Call an accountant what are the tax implications?

• Check zoning is the type of unit you propose allowed in your community?

• Consult your Realtor will the rental unit add value to your home?

• Speak to others seek the advice of friends who have gone before you.

More info:

Online

• www.nail-usa.com, National Association of Independent Landlords

• www.rental-housing.com, Rental Housing Online

• www.rent-right.com, Property management software

• Freeadvice.com, http://real-estate-law.freeadvice.com/ landlordtenant/

Books

• "Every Landlord's Legal Guide" by Marcia Stewart, Nolo Press, Berkeley, 1997.

• "Landlord's Handbook" by Richard Rusdorf, Dearborn Financial Publishing, 1998.

• "The Landlord's Troubleshooter" by Robert Irwin, Real Estate Education Co., Chicago, 1994.

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